Tax Reform Distortions

September 17, 2009 8:40 pm

Denying a tax reduction to everyone in Maine is more important than allowing year-round residents to get a bigger break than those who live here only part of the year. That’s the logic behind the most recent challenge to Maine’s newly passed tax reform legislation.

According to the conservative Maine Heritage Policy Center, the new tax law includes a “Welcome Back Tax.” That’s because a household credit is available only to full-time Maine residents. Someone who moved back to Maine partway through the year would not be eligible for the credit in that first year. They would get the credit in subsequent years. Calling this a tax increase is disingenuous at best.

Rather than a new phenomenon, however, this is how targeted tax credits work, which is why the attorney general found the credits in the reform law are constitutional well before the bill was passed. The Homestead Exemption and Circuit Breaker, which lower local property taxes, are available only to year-round Maine residents. Ditto for in-state college tuition and in-state hunting and fishing licenses.

Here’s what the Legislature said it intended: “[T]he household credit … is to provide relief to low-income and middle-income persons from the disproportionate cost of living in this state including the high cost of heating oil and the heavy reliance of the citizens of the state on heating oil, which is the highest in the nation; the high cost of transportation and the limited availability of public transportation; the disproportionate state and local tax burden, including the extension of sales tax to services; and the high rate of local property taxes that contribute to household costs.”

Some would like those disproportionate costs simply wiped away. Since that is not imminent, helping to alleviate the consequences of those costs seems rational.

If the household credit is unconstitutional, as the Maine Heritage Policy Center contends, then all of these other breaks would be as well. So, to use the center’s own logic, then they must be in favor of higher taxes for Maine residents.

Of course they’re not, which leads to the conclusion that the motivation behind this challenge is to stall or kill tax reform for political purposes.

The law, which lowers the state’s top income tax rates while expanding the state’s sales tax to many currently untaxed services, is supposed to go into effect on Jan. 1, which would mean Maine residents would pay lower income taxes next year. Opponents of the reform have submitted signatures to the Secretary of State’s Office to place a repeal of the law on next June’s ballot. If they have collected more than the required number of signatures, the law will be put on hold pending the outcome of the referendum vote. That would mean that Maine residents would continue to pay the current high income tax rate. That, to quote the Maine Heritage Policy Center, would be “punitive” to all the state’s residents.